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North Carolina Considering Cigarette Stamps to Deter Smuggling

State now at a tax disadvantage to bordering South Carolina.

February 7, 2010, 07:00 pm

RALEIGH, N.C. -- Criminals have been buying low-tax North Carolina cigarettes and selling them on the black market in high-tax states, such as New York, for years. Now, there is increased interest in restoring tax stamps in the southern state, one of three that doesn't require them, according to an Associated Press report.

"The cigarette tax evasion stampede is out of control," Jim Calvin, president of the New York Association of Convenience Stores (NYACS), told the news organization. More than half of cigarettes purchased in New York are bought without paying state or local taxes, largely because of out-of-state smuggling and Internet sales.

Interest in restoring tax stamps after a 16-year hiatus has been revived as a way to deter smuggling from North Carolina -- and in an ironic change -- into North Carolina. The state now may be the target for cheaper cigarettes from South Carolina, which has a 7-cent-per pack tax and doesn't use stamps. North Carolina's 45-cent tax has created a cross-border difference of $3.80 per carton.

"We've only been at a tax disadvantage since the tax went up in the past couple of years," Gary Harris with the North Carolina Petroleum and Convenience Marketers Association told The Associated Press.

Tax stamps provide evidence the wholesaler has paid the state tax before packs are shipped to retailers. Black-market vendors have a harder time selling stamped packs because they can't easily hide their origin or must try to replace the stamp with a counterfeit from another state. North Dakota is the only other state without stamps.

Eight years ago, a federal jury in Charlotte convicted two Lebanese citizens of diverting millions of dollars in cigarette smuggling money to Hezbollah by shipping North Carolina cigarettes to Michigan for resale. Another grand jury indicted nine people in November for an operation that allegedly brought in at least $5 million, the news organization reported.

"Criminal organizations all over the country exploit variants in state excise taxes and tax stamping laws to generate millions and millions of dollars in illicit profits," said Sandy Sands, a lobbyist representing Philip Morris USA, which wants to restore the stamps. "We're not talking about the people that come down and vacation at the beach and take eight or 10 cartons home with them to Ohio and Pennsylvania."

Lawmakers studying the issue are interested in restoring the stamps first used in North Carolina in 1969, when the first 2-cent tax on cigarettes was passed. The General Assembly eliminated the stamps in 1994 because the 3-cents-per-carton tax wholesalers got to keep for administrative expenses barely covered the costs of sticking them on the packs, according to Sands, a state senator at the time of the repeal.

Today, wholesalers receive a 2-percent discount, or approximately 9 cents per carton.

However, stamping machines can cost $80,000 each, said Sonny Wooten, president of Southco Distributing Co. in Goldsboro, N.C., and additional employees may have to be hired. Wooten said a 4-percent discount may be enough. Otherwise, the extra cost is eventually passed on to consumers, according to Andy Ellen with the North Carolina Retail Merchants Association.

Doubling the discount could remove several million dollars from the state's coffers after the General Assembly raised the cigarette tax by 10 cents a pack, according to the report.

Legislative researchers believe the state would lose another $5.4 million in annual tax revenues with stamps at the current 2-percent discount -- and spend $1.2 million every year to run the program. The analysis found the stamp requirement would discourage cigarette smuggling out of North Carolina, estimated at 18 million packs this year.